Markov switching regimes

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Markov switching regimes

Postby vasco1966 » Mon Apr 13, 2020 6:14 am


I am trying to estimate the following Markov Switching model of regime heteroskedastic:

inflation in time t = trend inflation + U2S1,t + U3S2,t + U4S1,t S2,t + (h0 + h1S2,t)Nt

where trend inflation = trend inflation(-1) + (Q0 + Q1S1,t)Et

Here, Si,t = unobserved state variable that represents the regime shift. Both S1,t and S2,t are assumed to evolve according to 2 independent first-order two-state Markov chains.

Shocks to the permanent (transitory) component take on the value Q0 (h0) if they are in a low-volatility state and Q0+Q1 (h0+h1) otherwise.

My question is this: how do you include the state variables into the equation to be estimated? How do you define the state variables (S1,t=0 given S1,t-1=0, etc) so that they can be included as regressors? Should the trend inflation equation be included as probability regressors?

Any guidance will be greatly appreciated

EViews Glenn
EViews Developer
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Joined: Wed Oct 15, 2008 9:17 am

Re: Markov switching regimes

Postby EViews Glenn » Mon Apr 13, 2020 8:55 am

Two things.

First, it's a little hard to read the notation so I may be misunderstanding what you are trying to do. If so, apologies in advance.

Second, if I am understanding correctly, you have a specification that is bi-linear in the states, with the product of the two state variables entering into the observables equation. Note that this doesn't follow the standard form of the linear state space model and cannot be estimated using our tools.

As to the specific question, you simply define new state variables using the @state keyword, and then enter those variables into the observables equation. The manual has examples. Also, you can use the Proc for specifying a state space model to auto-create a specification with some of those characteristics. This can give you an idea of how to adapt these tools to your specification.

Good luck.

Posts: 3
Joined: Fri Aug 23, 2019 5:55 am

Re: Markov switching regimes

Postby vasco1966 » Mon Apr 13, 2020 9:52 am

Thank you Glenn, this is very helpful and much appreciated

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